Musk: Model S demand will spur Tesla assembly plant in China

Telsa Model S sedans exit a production line at the company's assembly plant in Fremont, Calif., in July 2013. Tesla CEO Elon Musk said Thursday there is a strong argument to build the company's first plant outside the U.S. in China. Photo credit: BLOOMBERG

(Bloomberg) -- Tesla Motors Inc. CEO Elon Musk said sales of electric Model S cars in China should match U.S. levels as early as next year, with demand from the world's largest auto market eventually requiring a local plant.

The electric-car maker said the Model S will be priced from 734,000 yuan ($121,280) in China when deliveries begin.

Musk, Tesla's billionaire co-founder, will travel to China in late March to inaugurate the company's entry there.

For Tesla, "it could be as big as the U.S. market, maybe bigger. I don't want to get overexcited about it," Musk said. "Even without building there locally, it's always going to be the second-biggest market after the U.S."

After a rocky start ramping up Model S assembly in 2012, Tesla surprised analysts and investors this month when it said fourth-quarter deliveries were 20 percent above its target.

Musk, 42, has pinned his goal of selling hundreds of thousands of electric autos annually to a global strategy in which China, Europe, Japan and other markets bolster its U.S. business.

If all goes well, Model S shipments to China can match U.S. sales by 2015, Musk said.

"It's not my firm prediction -- it's more like a low-fidelity guess."

The company named for inventor Nikola Tesla more than quadrupled in value in 2013. Tesla shares fell $6.90 to close at $174.60 at the close Friday in New York trading Thursday, amid a broad decline in stock indices.

'Below expectations'

The price of Tesla's flagship Model S in China, a version equipped with a premium 85 kilowatt hour battery pack, puts it in the same bracket there as Volkswagen AG's Audi S5 sedan and BMW AG's 5-series GT sedan, according to Autohome, a car-pricing Web site.

It's also 50 percent more expensive than in the United States, where the equivalent model sells for $81,070, according to a Tesla statement.

While higher than the U.S. version, the Model S price for China appears "well below expectations," John Lovallo, an equity analyst for Bank of America who rates Tesla underperform, said Thursday in a research note.

Since the Model S is imported to China from California, a duty of as much as 25 percent is added to the price tag, Musk said.

The company also must cover shipping costs and taxes. Tesla could have charged more than $160,000 had it followed standard industry practices.

Musk: Ripping off customers is not a good long-term strategy.

'Huge idiots'

"They're basically calling us huge idiots for not ripping off customers in China." Musk said. "I don't think ripping off customers is a good long-term strategy."

Foreign companies have come under scrutiny in China for their pricing practices, with state broadcaster China Central Television producing reports accusing companies from Tata Motors' Jaguar Land Rover unit to Starbucks Corp. of overcharging consumers in the country.

"It's a good price," John Zeng, Shanghai-based managing director of researcher LMC Automotive, said of Tesla's Model S. "This should attract premium customers to try this product, especially in big cities."

Tesla's entry is also being closely watched by other automakers that have been trying to convince local consumers that electric vehicles are worth the hassle.

China is lagging behind its target to have 5 million alternative energy-powered vehicles by 2020 because of a lack of charging stations and high costs, even amid mounting concerns over worsening air pollution.

Rigorous standards

Gaining China's approval to sell Model S there was the toughest the company has faced to date, Musk said.

"They were the most rigorous of any in the world," he said.

Beyond safety issues, government officials even inspected the leather used in Model S seats, Musk said. "They seemed to be quite concerned about quality," he said.

To eliminate tariffs and potentially qualify for Chinese incentives for non-pollution autos, Tesla must produce there, he said.

"Long-term there's no question we'll have a factory in China," he said. "There is an argument for having that be our first major factory outside the U.S."

At Tesla's flagship store in a Beijing mall populated by high-end boutiques such as Van Cleef & Arpels and Mulberry, hotelier Kevin Chen says he's interested in buying the Model S to bump up his green credentials.

"I heard about the car from my friends overseas and we are very interested in getting one," said Chen, a 28. "Smog in China is getting so bad that we should do whatever we can to help."

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